Why the world needs a payrise
A growing number of influential economists have been echoing the fears expressed by Larry Summers, the former US Treasury secretary , that the world may be entering a new phase of ‘secular stagnation`. Today’s dominant economic model, it is now argued, seems only able to trigger growth through short-lived asset bubbles, raising the risk that ‘permanent slump` may become the new norm.
Driving this risk is the spread of deflationary pressures across the globe. This is down to two main factors. First, to depressed consumer demand caused by the shrinking of wage pools across rich nations. Secondly, to an unwillingness of the world’s largest companies to invest, despite historically high levels of profitability. The result: the main drivers of growth – private investment and consumer demand – no longer work.
Across a majority of rich nations, the share of output going to profits has been rising, leaving a declining share for wages, putting downward pressure on consumer demand, and upward pressure on borrowing. Countries like the US, UK and even Germany – where average real wages have stagnated since the millennium - are now entrenched low paid economies.
Compounding this problem has been a dearth of private investment. This is despite record levels of corporate cash holdings. While living standards have been falling, UK corporate cash piles now stand at a record £165 billion. American corporations have cash reserves of $1.45 trillion, the equivalent of over a tenth of the American economy, and up a remarkable 50 per cent since 2010.
The world is awash with spare capital – a mix of corporate surpluses and privately-owned liquid wealth. Before the 2008 Crash, these surpluses funded a surge of financial restructuring, merger and private-equity activity, mostly ‘rentier` activity which enriches the few but weakens the productive base of economies. During the slump, the cash piles could have launched a sustained investment and job-creating boom ending the recession years earlier. Instead, most of it has been idle, ‘dead money` according to Mark Carney, the Bank of England Governor. When they have spent, cash-rich firms have mostly preferred to buy back their own shares rather than invest. In contrast, small businesses are starved of the means to invest
It is this sustained dearth in investment – which predates the global crisis – that has fuelled the long run decline in productivity rates in the UK and the US, contributing to the building of more fragile, and crucially, low-paid economies. As well as depressing demand, the growth of low pay is also bringing severe economic side-effects. In Germany, the downward pressure on pay has been a deliberate policy aimed at boosting the nation’s exports, but only by passing deflationary pressures onto much of southern Europe. In China, low wages have made the country’s growth dependent on a credit-financed mass, but unsustainable, public investment boom. Across the world as a whole there is now a serious imbalance between aggregate wages and profits which is simply sowing the seeds of the next crisis.
One of the key solutions to this fundamental faultline is staring us in the face, a rebalancing of the wage-profit ratio in favour of wages. The world desperately needs a pay rise. Even a modest shift from profits to pay would boost consumer demand, and by doing so, raise the incentive to invest, while taking pressure of borrowing.
In both the US and the UK there is mounting public pressure to raise the wage floor. At $7.25, the US federal minimum wage has not been raised since 2007. In the UK, the national minimum wage is to increase by an above inflation 3 per cent rise in October. This is good news to the million employees who will benefit but will not provide the scale of correction needed. To crack the problem of imbalance and steer the world away from the risk of permanent slump needs a much more fundamental shift, one that raises pay for those higher up the wage chain as well. With cash surpluses at record levels, and likely to be used in ways that will intensify the risk of secular stagnation, a pay rise is not only affordable, it is an economic imperative.
Economies built around poverty wages and huge corporate and private surpluses are unsustainable. Until we correct for this great imbalance, today’s artificially created recovery will prove very short-lived.
Stewart Lansley is the author of The Cost of Inequality, Gibson Square, 2011 and, with Howard Reed, How to Boost the Wage Share, TUC, 2013.